After Strong Earnings, Netflix Sets the Stage for Long-Term Growth

If your New Year’s gift to yourself was a long position in Netflix (NASDAQ:NFLX), congratulations! Your investment has grown by nearly 60 percent in under a month, and the company’s fourth-quarter results embarrassed anyone with a claim to the 24 percent of the stock’s float that was short as of December 31. The stock is up over 63 percent over the past five days, and is trading around $166 per share, compared to about $100 before earnings.

Divisiveness between Netflix bulls and bears was incredibly high ahead of earnings. This is reflected not just in the large amount of short positions, but an enormously wide range of price targets held by analysts. A mean target of $109.22 is a product of highs of $190, which doesn’t seem that absurd right now, and lows of $45, which didn’t seem that absurd in August or October, when the stock was trading around $55.

At issue were subscribers and content fees. Bears were concerned that Netflix’s subscriber growth would slow in the quarter, compounding issues created by more expensive licensing agreements with Walt Disney (NYSE:DIS) and Time Warner (NYSE:TWX). But the company smashed expectations, adding 2.05 million domestic subscribers during the quarter, and at the same time increasing its contribution margin 2.1 points to 18.5 percent, a healthy and sustainable level.

The stock climbed an additional 13 percent on Friday morning in heavy trading, which may be indicative of a short squeeze. In any case, it’s clear the bulls win this round. Netflix’s strong fourth-quarter results have laid a foundation for the company to pursue compelling long-term strategies…